If the US Federal Reserve needed one final economic indicator to back a move to increase interest rates further when the FOMC meet again next month, today’s GDP reading will have provided just that. With US growth now at pre-financial crisis levels (4.2%), the futures market will continue to bet on another hike come December if growth continues in Q4. Whether Washington likes it or not, September may not be the last time the Fed tightens monetary policy this year.

With this second estimate for the second quarter, the general picture of economic growth remains the same; the revision primarily reflected upward revisions to nonresidential fixed investment and private inventory investment that were partly offset by a downward revision to personal consumption expenditures.

Another possible eurozone problem child, Italy, has seen its bond yields fall and the price rise today after recent weakness.

The support has come from a report in La Stampa newspaper saying that the country may seek help from the European Central Bank when it unveils new spending plans next month. Previously there have been suggestions the country’s propose budget could breach eurozone targets, and this has put its bonds under pressure recently.

US markets are expected to open unchanged, while Europe continues to drift lower. Craig Erlam, senior market analyst at Oanda, said:

It’s been a quiet start to trading on Wednesday, with equity markets in Europe slightly in the red and US futures pointing to a flat open in a few hours.

With NAFTA negotiations finally making progress, there is a sense of relief that the risk of a global trade war is easing, which has been supportive for sentiment recently. There is still a long way to go with Trump recently again threatening tariffs on cars from Europe and the US preparing another $200 billion of tariffs against China but any progress is welcome and it’s hopefully something we’ll see more of in the months ahead.

The Canadian dollar has gained ground in recent days on reports that it is re-joining talks and offering concessions that could result in an agreement by the end of the week. Trump had previously threatened to proceed with a US-Mexico trade agreement as a replacement for NAFTA, in effect cutting Canada out, which could have had a significant impact on the Canadian economy. While this was more than likely a bluff aimed at forcing the hand of the Canadians, it is a relief that no such move will likely be necessarily as it would have been harmful for all concerned.

Another factor pressuring markets is the continuing economic trouble in Turkey.

The Turkish lira has been under pressure on concerns about the outlook for the country, and is currently at a two year low. There is also a worry that Turkey’s problems could lead to wider contagion in emerging markets, and also spill over into Europe’s banking system.

Reuters reports that analysts at Man Group believe Spanish banks in particular are vulnerable to the problems in Turkey. The agency quotes Man as saying:

As the Turkey crisis persists and investors worry about contagion in the rest of the emerging markets, we believe the European banking system generally, and Spain especially, could be at risk.

Spain’s Ibex is currently one of the biggest losers among European markets, down 0.75%.

European markets slip back

Markets are slipping back after their early gains.

The FTSE 100 is now down 0.38% after sterling stablised on hopes that an extension to the October Brexit deadline for agreement could lead to progress in the discussions. The UK’s leading index is full of overseas earners which dislike a stronger pound. The dips in Europe are less severe, with Germany’s Dax and France’s Cac both down just 0.02%.

Asia’s positive session has not been carried over into the European morning so far, with indices either flat or lower in early trading. US markets look like they are running out of momentum for the time being, with the upcoming long weekend likely to be the culprit for some usual profit-taking.

After an early gain, the FTSE 100 has moved sharply into reverse, testing the 7600 level once again, this time from above. The index looks beset on two fronts this morning; first of all, the stronger dollar has stopped the commodity rally in its tracks, dragging down the mining sector, and news of a possible extension to Brexit talks has given sterling a lift.

It is important to keep some perspective here though – while the FTSE is essentially flat on the year (excluding dividends) it is at least 10% higher from the March lows. This kind of digestion of a big move higher is entirely normal in markets, so all is not lost for the index just yet.

German consumer confidence slips again

Earlier we had some disappointing consumer confidence figures from Germany.

Rising inflation and the likely effect of continuing trade tensions between the US and EU contributed to a dip in the GfK consumer sentiment index to 10.5 going into September from 10.6 the previous month. Analysts had expected an unchanged figure. This was the second month in a row that sentiment deteriorated. GfK said:

Despite the second decline in a row, consumers continue to assume that the good consumer economy will continue even if the dynamic could possibly drop off somewhat. Therefore, GfK expects that private consumption for this year will increase by 1.5 percent in real terms and meet the GfK forecast made at the beginning of the year.

The positive outlook for the consumer economy will only continue as is if the job market remains stable, which is the current assumption, and there are no additional risks threatening from the price front. A further increase in inflation would certainly dampen the consumer climate.

It’s a positive start in Europe, but by no means a really convincing one. Connor Campbell, financial analystat Spreadex, said:

Investors continued to greet the US-Mexico trade deal with wary positivity, the European markets just about nudging higher after the bell.

The FTSE, which got that belated bounce on Tuesday as it played catch-up following bank holiday Monday, opened up a few points, a smidge above 7630. There was even less of interest in the Eurozone, with the DAX and CAC at 12550 and 5500 respectively, with investors put off from doing anything else due to concerns surrounding the Italian economy.

Despite more front page worries about the cost and chaos of a ‘no deal’ Brexit, the pound managed to avoid furthering Tuesday’s losses as Wednesday got underway. Against the dollar it was unchanged at $1.287, while against the euro it actually rose 0.2%, lifting off of its recent near one year lows.

There’s really not a lot to work with this Wednesday morning, beyond the various ongoing macro-tensions, leaving investors sitting on their hands until this afternoon’s US Q2 GDP reading.

European markets open higher

The positive developments on the trade front following the US-Mexico deal have helped push European markets higher at the open. But the gains are limited by worries about Italy’s economy, following recent comments that the country might breach eurozone caps on public spending.

The FTSE 100 has opened up 0.15% while Germany’s Dax has added 0.16% and France’s Cac has climbed 0.17%. But Italy’s FTSE MIB is down 0.03%. Jasper Lawler, head of research at London Capital Group, said:

No records are expected to be broken in European share markets just yet. Some of the optimism about the deal struck between the US and Mexico has turned to concerns over Italian debt levels. Mexico reaching an amicable solution with the US, especially in the automotive industry, increases the likelihood Europe will end with a similar result. The positive industry news bodes well for recently pressured auto shares including Volkswagen and Citroen Peugeot.

Concerns about European bank exposure in Italy is a worry, hot off the heels of similar concerns over Turkey. The comments from the deputy prime minister about Italy breaching the 3% cap on public deficits is confirmation that Italy’s new populist government is even less fiscally responsible than its predecessors. Italy’s political upset combined with its high debt load are a significant risk factor for European equities though the second half of 2018.

Imports bounced back this quarter (+1.0% after −0.4%) as did exports to a lesser extent (+0.2% after −0.4%). All in all, foreign trade balance contributed negatively to GDP growth, −0.3 points, after a neutral contribution in Q1.

Agenda: Trade deals in focus as US growth expected to remain at 4%

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Stock markets continue to be lifted by the more positive outlook for the US trade situation, following the deal between President Trump’s administration and the Mexican government to replace the North American Free Trade Agreement. There are hopes too that Canada, the other NAFTA signee, will join the new deal within the next few days.

And although the agreement does little to indicate how things might develop in the US row with China and the EU, investors are taking the optimistic view for the moment. So with US markets hitting new peaks and Asia moving ahead overnight, European markets are expected to open higher. Here is our latest story on the positive response to the trade talks:

The main economic event of the day is US GDP which is expected to show strong growth in the revised second quarter figures. David Madden, market analyst at CMC Markets UK, said:

The consensus estimate is 4% ,and keep in mind the advanced reading was 4.1%. In the first-quarter the economy grew by 2.2%. There is a growing belief that President Trump’s tax cuts are kicking in, and we could see higher levels of growth at the back end of the year in comparison with the beginning. Yesterday, the US Conference Board consumer sentiment report hit is highest level since late 2000.

French GDP figures are also due shortly, with annualised growth forecast to reach 1.7%.